If you owe money in several different places, it can feel as though your financial situation is out of control.
Juggling multiple debts can be tricky, leaving you overwhelmed and struggling to keep track of payments.
Whether it’s overdrafts, credit cards, car loans or other types of credit, having more than one commitment soon adds up. And if you are at risk of missing payments, arrears and late fees can only add to the problem.
Finding a way to simplify your lending can be an important first step to taking control.In some cases, it could be cheaper and easier to manage if you consolidate your debts into one loan.
As well as simplifying things - you’ll have just one monthly payment to manage - this may be less expensive than paying off several different accounts at once.
For many people, debt consolidation is just what they need to get back in control of their money.
For people with more serious debt problems, agreeing a debt management plan with creditors could be the way forward.
Choosing which solution is the best for you depends on the type and amount of debt you have and your financial and credit status.
This simple guide will help you decide if debt consolidation is right for you and your circumstances, or where to go if you need further help to get on top of your situation.
What is a debt consolidation loan?
A debt consolidation loan is a personal loan that is large enough to pay off all your other credit commitments. It lets you combine all your outstanding balances in one place, with a single monthly payment. The interest rate you will be offered by a lender depends on the amount you want to borrow and your credit status.
Would a debt consolidation loan be right for me?
Combining your debts into one monthly payment can make it easier to get on top of your finances, and clear outstanding balances, but it depends on your individual circumstances.
You should make a careful budget to make sure you can afford the new repayment. And it is important not to allow other balances, such as credit cards, to run up again after you have cleared them - this will just leave you in even more debt. You could also speak to your credit card issuer to reduce the limit to the lowest you need, or close the card.
You should also be aware that if you take out a debt consolidation loan over a long period of time, it may end up costing more in the long term, even if the interest rate is lower.
Is a debt consolidation loan secured against my home?
Many providers offer an unsecured loan over £25,000.
However, if you need to borrow £25,000 or more over a long term, lenders are likely to ask you to secure the loan against your home. If you don’t keep up repayments, your home will be at risk.
It is important to understand what your new monthly payments will be, how long you will be paying them and if this is affordable for the duration of the loan. Think about what might happen if you had a sudden or unexpected change in your circumstances - would you still be able to pay?
I have a bad credit rating - can I still get a loan?
People with bad credit or who have had previous credit problems can still apply for a debt consolidation loan - but they are likely to be offered a higher interest rate if they are accepted.
Paying off debts consistently and on time will help boost your credit rating going forward - making you more appealing to lenders in future.
What is a Debt Management Plan?
In England and Wales, a Debt Management Plan - or DMP - is an agreement made between you and your creditors.
You’ll make one monthly payment, based on what you can afford.
It’s usually set up for you by a DMP provider - some are free, but others may charge a fee.
They’ll review your finances, negotiate with creditors for you and set up one manageable, monthly payment.
In Scotland there is a Debt Payment Programme (DPP) set up through the Accountant in Bankruptcy’s Debt Arrangement Scheme (DAS), where you would pay off your debt over a longer term.
The Accountant in Bankruptcy charges a fee for running a DAS. And the DAS is a legally binding arrangement.
This can be a positive step for people with serious debt problems but there are some points to be aware of before you proceed.
Interest may still be charged on debts not included in your plan. A DMP or DPP may not be the quickest solution when trying to clear your debts.
Even if you keep up with payments, the fact that you’ve had a DMP or DPP will show on your credit file and could affect your ability to access credit in the future.
Where can I go for advice?
Dealing with debt can be complicated and emotional. Working with an independent debt adviser may help you understand your options and find the most suitable one for you.
Organisations such as Citizens Advice and StepChange provide free help and support, while it’s always a good idea to speak to your lender.
MoneyHelper is the government’s money advice website which can be found here.
For more information and advice on dealing with debt and problem debt, including details of organisations who can help, click here: help with managing debt